A new economic era: Seniors' changing financial status will set the pace. (Seniors Housing).

THOSE OF US IN THE SENIORS HOUSING AND HEALTH CARE industry tend to take business and financial cycles in stride. Most of us look at a broad time horizon and recognize that these cycles "come with the territory." But many seniors have a much shorter financial time horizon. The economic trends of the last two years have had some significant, and possibly irreversible, impacts for some seniors. This should serve as a mild wakeup call for our industry.

Let's look at three common financial indices that reflect the primary income-producing capacity for many seniors. These indices are CD interest rates, Treasury bill coupon rates, and the equities market represented by the Standard & Poors (S&P) 500 stock index.

A typical senior with a $35,000 annual after-tax income--which is modest by today's senior-living affordability standards--will typically have a mix of investment instruments generating this income. Assuming a modest 12 percent average income-tax bracket, this typical senior's total pretax savings portfolio annual income must be approximately $40,000 to net the after-tax $35,000 target. This income could include Social Security of approximately $875 per month or $10,500 annually for a typical widow. Subtracting Social Security income, the annual return needed from a senior's basic savings portfolio is approximately $29,500. This income typically comes from a savings portfolio that is very sensitive to prevailing fixed-income interest rates--or for many, short-run stock market performance. For example, Mrs. Barker, 82, has experienced income of $29,500 at a 6 percent fixed income return on her savings portfolio. This would indicate that the portfolio value is approximately $490,000 ($29,500/.06).

Low interest rates are generally good for business. But it does not always work that way with seniors. That's because seniors in the $35,000 to $40,000 income range typically must spend 65 percent to 85 percent of their income for independent and assisted-living monthly service fees, respectively. And sponsors consider 3 percent to 4 percent annual fee increases "normal and reasonable." Those annual increases represent the real inflation rate for senior-living and health care residents. Many senior-living residents and new prospects have lost considerable savings-portfolio value and purchasing power in the past two years. (See "Senior investment returns plummet," at left.)

If our Mrs. Barker is heavily invested in equities, she could have experienced a 20 percent reduction in her portfolio in the past two years, approximately $100,000. Monthly income from that portfolio would also be down considerably. If Mrs. Barker is relying heavily on fixed- income savings instruments, such as CDs and Treasuries, she may have experienced at least a 50 percent reduction in her interest income over the past 12 to 14 months. That's an income reduction of over $1,000 per month.

It's true that historical trends indicate that the financial markets will eventually turn around. But experts really don't know how long it will r take. This could result in a reduction in market demand, just when the supply side of the industry appears to be coming back in balance.

Our industry must quickly respond to five implications: (1) diminished savings-portfolio performance in terms of savings rates and stock-portfolio values; (2) more focus and reliance on liquidated home equity resulting in increased sensitivity to entry fees; (3) higher incidence of necessary asset spend-down for a given income class; (4) less discretionary or spendable income; (5) much higher levels of financial sensitivity.

Our understanding and sensitivity to the senior consumer financial challenges have not received proper emphasis. The senior's financial status has, in my opinion, been subordinated to a "don't ask, don't tell" psychology. In large part, we've chosen to stay out of the senior consumer's personal financial planning. That's all changed now. We must adopt financial planning for seniors as a major product positioning platform. It must be one that is prudent and logical, involving more substance than just politically correct rhetoric or fancy sound bites.

There are five major independent and assisted-living strategies that can be deployed to address this growing challenge. These will be addressed in next month's column.

Jim Moore is president of Moore Diversified Services, a Fort Worth, Texas-based national senior housing and health care consulting firm. He is author of Assisted Living 2000 and, most recently, Assisted Living Strategies for Changing Markets.

Senior investment returns plummet

Typical senior savings

Portfolio               Year-end position        2-year savings
components              2000       2001     portfolio impact (1)

CDs (1 year)            5.5%        2.7%         -51.0% (2)
T-Bills (1 year)        5.3%        2.2%         -58.5%
Equities (S&P 500)
 500 Index            -10.2%      -13.0%         -21.9%
 $490,000 portfolio  $440,020    $382,815      ($107,185)

(1)Assumes a $490,000 savings portfolio.

(2)A 50% reduction in interest rates results in an annual loss of over
$13,000 or $1,000+ per month.

Source: Moore Diversified Services, Inc.